Smooth convergence in the binomial model
Resource
Finance and Stochastics 11 (1): 91-105
Journal
Finance and Stochastics
Pages
91-105
Date Issued
2007
Date
2007
Author(s)
Chang, L. B.
Palmer, K. J.
Abstract
In this article, we consider a general class of binomial models with an additional parameter λ. We show that in the case of a European call option the binomial price converges to the Black-Scholes price at the rate 1/n and, more importantly, give a formula for the coefficient of 1/n in the expansion of the error. This enables us, by making special choices for λ, to prove that convergence is smooth in Tian's flexible binomial model and also in a new center binomial model which we propose. © Springer-Verlag 2007.
Type
journal article
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